How the Democrats became the only fiscally responsible party

The comments raise many different and interesting issues also, as usual, it's hard to know where to start. Fortunately for me, comments were already disabled by the time I read the blog.

#43 Dr. Hilarius

Expression of deficit worries are for the rubes in the cheap seats. (I agree.)

Reasons why government spending needs to grow faster than the economy:

1) Demographics
2) Urbanization

Don't hear about urbanization much in arguments with government starvers. Here's what Dr Hilarius says:

If you live on 60 acres in a sparsely populated area, you can get by on a septic system, burn or bury what garbage the pigs won’t eat and get by with a two-lane road without stoplights. In the big, wicked city you need expensive sewage treatment, sewer lines, complex traffic management, garbage collection and on and on. New problems of surface water management and non-point pollution.

Yes, great explanation. But it seems to me his best point comes at the end.

Politicians invoke the old virtues and suggest that family, church and community can replace government services. Too bad capitalism has destroyed those very institutions.*

(*He previously remarked that this comes from family mobility, which he first tagged as Urbanization, but it's also capitalism. If I can make a much better living in some distant town, it makes sense that I should go there.)

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There's an extended argument over many posts wrt CR's claim that Clinton actually had fiscal surplus at the end of has administration and was paying down the debt. Nigglers like to argue this away using alternative numbers which include payments Social Security will have to make 30 years from now. I agree with Corey's claim, and he spells it out later, with link to the numbers from the non-partisan CBO which show surplus from 1998 to 2001, for the first time in a long time (since Nixon IIRC).

While I admit that this was partly good luck, one should remember that the Clinton era began with tax increases as did the Bush I era that came before it. Republican naysayers have said two things that have turned out to be untrue.

1) US Federal government will never balance the budget (wait, it did, several times..., most recently under a Democratic President.)

2) The Clinton (or Bush I) cuts will destroy jobs. When in fact the 1990's was the last significant job creating era. The tax cutting era of Reagan was about average at best. The completion of Reagan's tax gutting by GW Bush has led to the calamity of today. And, the biggest rub to supply side economics should be this: the Carter era job growth in private industry has not been surpassed. But unfortunately for Carter, it was his selected Fed chair, Volker, who helped end Carternomics just as much as Reagan did, actually probably even more.

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There's some mixed discussion about Baumol's Cost Disease. Like several posters, I don't like the term but it does reveal something important about an overall economy. If the manufacturing industry (and it usually is manufacturing) increases productivity by some amount, people may like a few more of those particular manufactured goods, but, overall, will still want a bit of everything else too. So that means workers in the newly efficient industry will have to move to other industries. And the invisible hand of capitalism is there to help in the usual ways. First, it will be very hard for those in the efficient industry to keep their jobs and overall salaries there might decrease, prompting (perhaps) people to go elsewhere for work. Meanwhile, pay in other sectors--sectors that did not experience a productivity change--will increase (in order to attract people to those jobs!).

This is often explained in other ways, but to me, it is most obviously a result of consumer preferences, which are, indeed, a key part in any economy (and have been studied, albeit poorly as described by Steve Keen, by economists as they understand it a very key part of economics, all the better to be brushed aside with a logical impossible theory as they usually do).

The always illuminating Bruce Wilder directly addresses the milieu in which the term was coined and how it differs from today. Back in the 1960's there had been sustained wage growth tracking productivity for decades. Beyond a doubt, in this environment, it would only be expected that the price of luxury services would increase too, even if not subject to the same sort of productivity increase. Bruce says:

On present trends, the U.S. economy is becoming service-oriented, and the median wage is on track to decline over the rest of the decade, in a reversal of Baumol’s cost disease, despite continuing increases in productivity, because of increasingly extreme upward redistribution of wealth, income and political power.

Then Bruce switches his focus to what he claims Baumol never considered: economic rent. This leads to another of his best gems:

Any sensible economic policy, of taxation or regulation, would divert economic rents to public purposes, and radically reduce the claims of the very wealthy. And, consequently, any sensible economic policy would be tantamount to revolution. The Democratic Party establishment is unlikely to get behind revolution, even if the Republican Party adopts pre-emptive counterrevolution as its policy. So, the U.S. will continue driving toward the cliff, and almost certainly go straight over the precipice.

I agree this is most likely to occur.

The underlying problem is not debt. It is the unmitigated power of the Rentier Class, which was held in check during the Golden Age of the New Deal (1933-1970), and now seeks to destroy the very government that makes it possible.

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Baumol's study looked at the salaries of musicians. For the performance of classical music, it takes as many musicians to perform a Beethoven symphony as it did when it was written. So has the productivity remained the same?

I think this is an interesting question that none of the Baumol-thread commenters addressed. (The name Baumol first appeared in a comment, unsurprisingly, by a conservative commentator.)